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CME Group Inc. (CME)

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CME Group Inc. (CME)

Q2 2009 Earnings Call

July 23, 2009 8:30 am ET

Executives

John Peschier - Managing Director, Investor Relations

Craig Donohue - Chief Executive Officer

Jamie Parisi - Chief Financial Officer

Terry Duffy - Executive Chairman

Rick Redding - Head of Products and Services

Analysts

Mike Carrier - Deutsche Bank

Rich Repetto - Sandler O'Neill

Daniel Harris - Goldman Sachs

Howard Chen - Credit Suisse

Niamh Alexander - KBW

Mike Vinciquerra - BMO Capital Markets

Chris Allen - Pali Capital

Ken Worthington - JPMorgan

Roger Freeman - Barclays Capital

Don Fandetti - Citi

Dan Fannon - Jefferies

Rob Rutschow - CLSA

Justin Schack - Rosenblatt Securities

Presentation

Operator

Good day, everyone and welcome to the CME Group second quarter 2009 earnings call. As a reminder, today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the conference over to your host, John Peschier. Please go ahead.

John Peschier

Thanks and thank all of you for joining us this morning. Craig Donohue, our CEO; Terry Duffy, our Executive Chairman; and Jamie Parisi, our CFO will spend a few minutes outlining the highlights of the second quarter and then we will open up the call your questions.

Also joining us for participation in the Q&A session is Rick Redding, our Head of Products and Services.

Before they begin, I will read the Safe Harbor language. Statements made on this call and in the accompanying slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, including our most recent Forms 10-K and 10-Q, which are available on the Investor Relations section of our website.

During this call, we will refer to GAAP and non-GAAP pro forma results. A reconciliation is available in our press release and there is a file on the Investor Relations portion of our website that provides detailed quarterly information on a GAAP and pro forma basis.

With that I would like to turn the call over to Craig.

Craig Donohue

Good morning and thank you for joining us today. I'll begin by spending some time covering our second quarter highlights, and then Terry will take a few minutes to discuss the current regulatory environment and after that I'll turn the call over to Jamie for a more detailed discussion of our financial results.

I'm pleased to report another highly profitable quarter. On a pro forma basis, we achieved revenues of $648 million and operating income of $405 million. Earnings per share were $3.37 for the second quarter, and we continue to exhibit strong expense discipline and operating leverage as evidenced by operating margins of 63%. Pro forma operating expenses were $243 million, down 4% from the first quarter.

While the macroeconomic conditions in the first quarter were marked by ongoing certainty, in the second quarter the economy started to show increasing signs of stabilization. One closely monitored metric, the LIBOR-OIS, spread trended consistently downward over the quarter ending June at the lowest level in nearly 18 months. A decrease in volatility in many asset classes during the second quarter further indicates growing economic stability.

In our markets, the key measure of increasing stability that we have observed is increased liquidity as marked by improvements in depth of book and bid/ask spreads across all asset classes from Q1 '09 to Q2 '09.

Getting into a few highlights on volume, June saw 11.4 million contracts in average daily volume. This is the highest monthly volume of the year led by interest rate products as the steepening yield curve drove intermediate and long-term hedging activity by market participants.

At the peak of this activity, CME Group's interest rate complex saw the highest volume day ever on June 5th with 10.9 million contracts traded.

Our treasury complex has shown growing cash market penetration or treasury futures activity as a percentage of cash treasury trading activity over the course of 2009 ending the quarter at 53% up from 46% at the end of December. This positions us well for the return of more dynamic interest rate expectations.

Ten-year interest rate swap futures had both a record June and a record second quarter with average daily volumes of 9,500 contracts in June and 4,900 contracts in the second quarter.

Finally, the current environment has generated uncertainty further out on the yield curve and average daily volume in our back month Eurodollar contracts are up 21% for the quarter versus the same period last year.

Our FX product line also had strong volume in June, the fourth highest monthly volume ever with average daily volume of 702,000 contracts. In addition, CME Group's FX products gained significant traction versus the over-the-counter markets in June and in Q2.

Looking beyond product performance to our customers, we can see some moderately favorable trends in the customer segment data from Q1 to Q2. Proprietary buy-side traders have increased from 39% of volume to 41%. Hedge funds increased slightly and accounted for 6% of volume, the first quarter in a year that did not show a decline in hedge fund contribution.

Bank proprietary trading activity accounted for 14% of volume, other member activity 22% and non-member activity 17%. This segmentation is for legacy CME CBOT products only.

Additionally, we are seeing favorable trends in global customer acquisition with increased trading out of new proprietary accounts in the EMEA region.

Taken together, we believe all of these figures underscore that our customer base has remained relatively unchanged even following the impacts of the credit crisis, and that we are seeing increased confidence in overall economic conditions.

While we can't predict the timing for complete economic recovery, we do believe that our markets and products continue to demonstrate their value and that further improvements in the economy and financial markets have the potential to generate increased hedging and risk management activity.

Read the rest of this transcript for free on seekingalpha.com